Lux­em­bourg: high po­ten­tial, low risk

Lux­em­bourg is a cen­ter of in­ter­na­tional fi­nance and an ad­min­is­tra­tive head­quar­ter for the EU. More­over, the suc­cess­ful ex­pan­sion of CLT-Ufa (RTL) made Lux­em­bourg one of Europe’s most im­por­tant lo­ca­tions for the TV in­dus­try. All this re­sults in a sig­nif­i­cantly above-av­er­age share for ser­vice in­dus­tries in to­tal re­gional pro­duc­tion. Within man­u­fac­tur­ing, which ac­counts for just a small share of re­gional out­put, steel-pro­duc­ing in­dus­tries play the most im­por­tant role. In con­trast to other steel-pro­duc­ing lo­ca­tions, Lux­em­bourg’s steel in­dus­try suc­ceeded in in­sur­ing its in­ter­na­tional com­pet­i­tive­ness by spe­cial­is­ing in so­phis­ti­cated high-tech steels.

Feri Real Es­tate Mar­ket Rat­ing rates Lux­em­bourg as a busi­ness lo­ca­tion “AAA”, which is up­graded from the first quar­ter 2014. It trans­lates into “high po­ten­tial, low risk”. With this rat­ing re­sult the city ranks first among Euro­pean me­trop­o­lises.

Re­gard­ing of­fice real es­tate Feri rates Lux­em­bourg “C”, which is down­graded from the first quar­ter 2014 and ranks 15th among of­fice lo­ca­tions of Euro­pean me­trop­o­lises.

Lux­em­bourg is one of Europe’s smaller of­fice space mar­kets, with around 3 mln square me­ters to­tal vol­ume. The prime lo­ca­tions, where the high­est rents are charged, are in the cen­tral busi­ness dis­trict and near the train sta­tion. The largest sub-mar­ket in terms of floor space is Kirch­berg, pre­ferred by EU or­gan­i­sa­tions and the in­ter­na­tional fi­nan­cial sec­tor. The in­vest­ment mar­ket is quite trans­par­ent, but the liq­uid­ity risk is rel­a­tively high.

The lat­est fi­nan­cial cri­sis had a mod­er­ate ef­fect on of­fice rents in Lux­em­bourg, re­sult­ing in re­duc­tions of around 5%. Be­cause of in­cen­tives of­fered to en­cour­age the leas­ing of bet­ter-qual­ity space, rents re­mained sta­ble last year, de­spite a de­creas­ing va­cancy rate. From the sup­ply side, the mar­ket should see fur­ther re­lief from its past loose­ness – new of­fice com­ple­tions are set to drop be­low the long-term av­er­age. Lux­em­bourg’s econ­omy is ex­pected to grow bet­ter, which will sup­port de­mand for of­fice space and of­fice rents should rise by around 2% per year over the fore­cast hori­zon, slightly above the long-term trend.

The price cor­rec­tion on Lux­em­bourg’s in­vest­ment mar­ket has been rel­a­tively mod­er­ate. Since 2007, rental yields have in­creased by only 80 ba­sis points. Last year, the mar­ket re­mained sta­ble, thanks largely to the great re­straint shown by Ger­man open-ended real es­tate funds. Trans­ac­tion vol­ume picked up sig­nif­i­cantly in 2014 and let ini­tial yields de­crease fur­ther with a tight sup­ply of high-qual­ity ob­jects. Over the year, a fur­ther slight com­pres­sion of rental yields is ex­pected.

In the re­tail sec­tor, Lux­em­bourg is a popular shop­ping des­ti­na­tion for peo­ple from neigh­bour­ing coun­tries. This pat­tern is sup­ported by a large share of for­eign com­muters in the lo­cal work­force, as well as by the fact that lo­cal con­sump­tion taxes are low. Given Lux­em­bourg’s good prospects for in­come growth along with eas­ier shop­ping pos­si­bil­i­ties thanks to the in­tro­duc­tion of the euro, chances are good that re­tail sales and hence re­tail rents, at both top and sec­ondary lo­ca­tions will rise fur­ther in the com­ing years af­ter a short break from 2009 un­til early 2010. Dramatically high price jumps will not oc­cur.

When it comes to res­i­den­tial real es­tate, Lux­em­bourg ranked tenth among Euro­pean me­trop­o­lises with a rat­ing re­sult of “A”.

Since the late 1990s both a pos­i­tive eco­nomic per­for­mance and a ris­ing pop­u­la­tion have helped to in­duce ris­ing rents on Lux­em­bourg’s apart­ment mar­ket. Yet no re­ally dra­matic price leaps are recorded. Dur­ing the com­ing years, con­tin­u­ing al­beit rel­a­tively mod­er­ate rent in­creases are ex­pected, sup­ported by Lux­em­bourg’s good per­for­mance with re­spect to dis­pos­able in­comes and on­go­ing solid de­mand, in con­junc­tion with low new build­ing ac­tiv­ity. Among other things, en­large­ment of the EU pro­vided a good boost for de­mand. How­ever, be­cause rents in the city of Lux­em­bourg are enor­mously higher than those in sur­round­ing ar­eas, more ac­tiv­ity in the rental hous­ing mar­ket will shift out­side the city.

Sale prices for res­i­den­tial real es­tate rose steadily through much of the last decade. How­ever, the fi­nan­cial cri­sis caused a mild dip in the mar­ket in 2009. Since build­able land is both scarce and ex­pen­sive, mar­ket ac­tiv­ity con­cen­trates on ex­ist­ing res­i­dences.

De­mand for con­do­mini­ums – par­tic­u­larly new, welle­quipped con­do­mini­ums as well as nicely ren­o­vated ex­ist­ing ones – has been no­tably high. Lux­em­bourg’s favourable out­look for strongly ris­ing dis­pos­able in­comes – es­pe­cially since th­ese are al­ready rel­a­tively high – sup­ports an ex­pec­ta­tion for an up­com­ing in­crease in the re­gion’s rate of home own­er­ship.